Bailey v. Hannibal and St. Joseph Railroad Company

ERROR to the Circuit Court for Missouri; the case being thus:

The Hannibal and St. Joseph Railroad, in Missouri, with an income of but $450,000, and having a capital stock of $3,000,000, a debt of $8,000,000 of 7 per cent. bonds, and an arrear in interest of $4,000,000-both bonds and interest-secured by mortgage on all the property of the company, found itself, A. D. 1862, in consequence of the then universal depression of values brought about by the rebellion, in such embarrassments that it could neither pay dividends on its stock nor interest on its debt; and as the State of Missouri had a lien of $3,000,000 upon it, which had precedence of every other claim, it became obvious that some vigorous measures of reorganization were necessary if anything was to be saved for either bond creditors or stockholders.

In this state of things, on the 15th of October, 1862, the company issued to the several holders of its bonds a circular entitled, 'A plan for extricating it from its present difficulties, and improving its securities.' In this plan the company proposed to these several bondholders that they should exchange their bonds in part for other bonds, having a longer time to run, and in part for preferred stock; 'the preferred stock to be 7 per cent., and not cumulative, but to share with the common stock any surplus which may be earned over and above 7 per cent., UPON BOTH, in any one year.'

Prior to November 24th, 1862, all the bondholders had come into this plan; their assent being signified by an agreement in these words annexed to the plan itself:

'We, the subscribers, owners of bonds issued by the Hannibal and St. Joseph Railroad Company, of the kinds and amounts set opposite our names, respectively, hereby agree to surrender the same and receive in exchange therefor new bonds and preferred stock, in accordance with the provisions of the plan for extricating the company from its present difficulties and improving its securities, dated 15th October, 1862, and hereunto annexed.'

On the same 24th of November, 1862, the board of directors of the road

'Voled, that Messrs. Bartlett, Thayer, and Hunnewell be, and they are hereby appointed a committee with power to carry out the intention of the circular of October 15th, 1862, entitled 'A plan for extricating it from its present difficulties and improving its securities,' and that they are authorized to make such expenditures therefor as to them may seem discreet.'

This committee, in discharge of the duties of their appointment, reported an 'indenture' to be executed by the company on the one hand, and the bondholders or the trustees of the mortgage on the other, which, after referring to the embarrassments of the company, went on to give effect to the plan; though no reference was anywhere made in the instrument to this agreement itself. The indenture contained this clause:

'And said corporation covenants and agrees that said preferred stock shall be entitled to a dividend of 7 per cent. from the net earnings of said road in each year, whenever a dividend of said net earnings shall be made, before any dividend shall be declared upon other unpreferred shares of said corporation, and to an equal dividend with said other shares in the net earnings of said corporation beyond SAID 7 per cent., but in no case to be entitled to an accumulated dividend (in case a dividend shall fail to be made in any one or more years, or, if made, be insufficient to pay said 7 per cent.) in any subsequent division of said net earnings, but shall be entitled only in that event to SAID 7 per cent., and to share in said surplus earnings as aforesaid.'

On the 1st April, 1863, this form of indenture being laid before the board of directors, was by it referred to a stockholders' meeting to be held on the 30th May, 1863. At this meeting the board of directors were

'Instructed to procure and adopt, on behalf of the corporation, such certificates in relation to the preferred stock, to be issued under said agreement, as may be necessary to carry the same into effect, and cause the same to be executed in behalf of this corporation in such manner as they may think best.'

Under this authority the indenture was accordingly executed by Mr. W. H. Swift and others, trustees for the bondholders, on the one part, and the company on the other; and the directors, on the 26th June, 1863, prepared and adopted a form of certificate thus:

NUMBER. [STATE OF MISSOURI.] SHARES.

Hannibal and St. Joseph Railroad Company.

PREFERRED STOCK. }

SHARES $100 EACH.}

SEVEN PER CENT.

Issued in adjustment of the bonds of said company,. . . and subject to the terms and conditions of an indenture between said corporation and W. H. Swift and others, trustees, dated April 1st, 1863, and with the rights set forth therein, and may be transferred upon the books of the company and new certificates issued, and may be used, with the bonds of said company bearing date April 1st, 1863, in the purchase of its lands, as provided in said indenture.

The Hannibal and St. Joseph Railroad Company hereby certifies that, in consideration of the surrender and placing in trust of bonds and coupons in pursuance of said indenture, ..... is entitled to ..... shares of the preferred stock of said corporation, and to receive all the net earnings of said company which may be divided pursuant to said indenture in each year, up to $7 per share, and to share in any surplus beyond $7 per share which may be divided upon the common stock.

WITNESS the seal of the corporation and the signatures of the transfer agent and of one of the directors, at Boston, Mass., the ... day of ....., A. D. 186....

Transfer Agent.

Certificates were made out accordingly in this form, and given to the bondholders, who received them without any expressed exception to their tenor.

In January, 1870, the company had so far retrieved its disasters as to declare a dividend of 7 per cent. on the preferred stock. Having yet a surplus it made a dividend of 3 1/2 per cent. of it to the common or unpreferred stock, to the exclusion of the preferred stock, and was about to make another dividend of 3 1/2 per cent. in the same way.

Hereupon one Bailey, owner of several shares of the preferred stock, filed a bill, annexing the indenture and form of certificate, but not the plan, as exhibits, to enjoin this further dividend on the unpreferred stock, and to have it appropriated to the preferred stock.

The defendants answered the bill, annexing the plan and form of certificate, but not the indenture, as exhibits, and contending that on a true construction of the documents in the case no such appropriation ought to be made; and on the hearing they introduced, against the objection of the plaintiff, the evidence of persons who had prepared the indenture, that it was drawn with the purpose of giving effect to the plan, and that from the commencement of the transaction to its conclusion parties concerned understood the transaction as they, the defendants, alleged it when rightly construed to be.

The court dismissed the bill and the complainant appealed.

Messrs. Glover and Shepley, for the appellant:

1. The evidence as to how parties other than Bailey understood the arrangement was so palpably improper that we spend no time in arguing the point that it was so.

2. The indenture is the contract, and the only contract in the case. All preceding suggestions and propositions were merged in this more solemn instrument. Now, the words 'said 7 per cent.' in it show that the meaning of the parties was that the holders of the preferred stock should equally share in any dividend which might be declared from the net earnings beyond 'the said 7 per cent.,' which by the terms of the indenture was first to be set apart for a dividend upon the preferred stock.

3. There is nothing in the concluding language of the certificate opposed to this idea. Contrariwise, that language accords with the idea. When, after speaking of the dividend of $7 per share to be applied as a dividend upon the preferred stock, the sentence continues 'and to share in any surplus beyond $7 per share,' it has reference to the surplus remaining after the $7 had been applied to the payment of a dividend of that amount on the preferred stock. At best the language is doubtful, and as the certificate on its face declares that it is issued 'subject to the terms and conditions of the indenture,' and 'with the rights therein set forth,' the doubt must be cleared up by the plain language of the solemn and fundamental instrument of the contract. Nay, if the concluding language of the certificate were opposed to Bailey's claim he would have a right to have the certificate reformed, according to the indenture to whose 'terms and conditions' it declares that it is issued. The indenture does not state that it is made in pursuance of execution of the plan, or even so much as refer to it.

The fact is that the defendants, to overturn our claim, have to reconstruct the whole contract. They have to add to the sentence a new phrase, containing a new idea, as thus:

'And to an equal dividend with said other shares in the net earnings of said corporation beyond said 7 per cent., after an equal dividend shall have been next declared upon the said unpreferred stock.'

Messrs. T. T. Gantt and J. Carr, contra:

There is a radical defect in the argument of the opposing counsel in supposing that the indenture is the fundamental contract. The plan, which was so specifically assented to by the bondholders as that their assent is on a paper appended to it, is the basis of everything. The indenture was undoubtedly prepared and executed to carry it out, and if giving rights varying from it, might be reformed by it. Now, by the plan, the 7 per cent. is to be 'not cumulative, but to share with the common stock any surplus which may be earned over and above 7 per cent. upon both in any one year.' This language is fatal to the complainant's case.

The word 'said,' which makes the complainant's strongest point, is exceedingly apt, even in carefully drawn documents, to be inadvertently repeated. In this case, unlike most cases, the inadvertence somewhat affects the meaning. But all the documents form part of one transaction, and of course are to be taken together. The indenture is to be read by the light of the plan which preceded and the certificate which followed it. The maxim of the law is, 'Ex antecedentibus et consequentibus optima fit interpretatio.' And when we look at the plan submitted, the circumstances under which the committee which drafted the indenture was appointed, the agreement with the bondholders which the committee was instructed to embody and carry out, the action of the directors upon the indenture, the reference of the question of its adoption to a stockholders' meeting, the guarded terms of the resolution then passed, and, finally, the definition unequivocally given, of the nature of the preferred stock by both the corporation and its bondholders, by the form of the certificate adopted, all doubt vanishes as to the construction which must be placed on all the documents.

To all this may be added, though it is unnecessary, the concurrent testimony of persons who prepared the indenture and other parties concerned in the matter; a sort of testimony not, we think, improper, and which, if received, is in its nature strong.

Mr. Justice CLIFFORD delivered the opinion of the court.